Sunday, June 7, 2015

The Wal-Mart Effect

This article was originally written in 2009 for my personal blog. Since then, many of my predictions have come true. Blockbuster and other specialty retailers have shuttered. Wal-Mart's hold on the economy is not as strong as it was back then, but it is still a juggernaut. Luckily, people are beginning to see the company's detrimental effect on the economy are fighting against it. 

We all hate Wal-Mart. 

We hate the over crowded stores, the under manned registers, the clutter, the dirt, and the freaks that are regularly on display. We hate the loud, annoying children running around, and the shopping carts whose wheels barely turn. Then why do we all shop there? The answer is obvious: IT'S SO CHEAP!

Wal-mart fills a couple of spaces in our daily lives. Number one: it's cheap. Most of us don't have that much money and we have to make it go a long way. Secondly, it's convenient. Most of us are also very busy. We work, we have families, we have a lot of shit to do. We don't have time to run all over town to 10 different stores to get what we need. We want to go to one place and walk out with everything we need. And what's wrong with any of that?

On the surface, I would say nothing. There is nothing inherently wrong about getting the stuff we need in one place and at a reasonable price. Having lived in a Wal-Mart saturated country for my entire life, though, I have seen evidence to the contrary. To be totally honest, I have not done much research on this topic. These are just the things I've noticed over the past 10 years or so. Maybe it's totally different outside my neck of the woods. 

To illustrate the Wal-Mart effect, let's look at our friend, the Movie. In the early days of cinema, there was no home video. If you wanted to see a film, you had to go to the theater. Then, around the mid 70's, the VHS tape was invented and suddenly,  you could watch movies in your home. (We're ignoring the format wars and other details involved.) The movie industry was, no doubt, worried about their theater revenue in an age where you didn't have to leave the house to see a film. So, they came up with two ideas. 

First, films were released in the theaters first, with home video release to follow in the next year or so. Once released on home video, however, the price was initially very high. VHS tapes, upon first release, would sell from anywhere between $60 and $100. Most consumers weren't willing to pay the price to own the tapes, and thus,  the rental age began. 

Mom and Pop shops cropped up all over town. They were typically small, and only carried one or two copies of each film. Selections were normally pretty varied and even featured "back rooms" for adults only. The shops would purchase the expensive tapes and then rent them out to customers for a fraction of the price. Being the new fad, video rentals were through the roof. All was well for Mom and Pop until a certain video retailer showed up.

You could arguably pinpoint the Wal-Mart effect's origins with the birth of Blockbuster (and other mass video retailers.) Video chains began popping up in prime locations, and began siphoning business from the Mom and Pop's all around them. They were much larger and featured many more copies of major film releases than any of the small stores around them could afford. Eventually, the Mom and Pop's were either absorbed by the chain or simply went bankrupt. The selection of movies became less varied, and the back room was a thing of the past. 

For many years, VHS rentals thrived. Chains like Blockbuster, Hollywood, and Movie Gallery raked in the money. Movies were big business, and everyone involved was making huge bucks. The studios were happy. The theaters were happy. The rental chains were happy, and so were the customers. Everything was going so well.... until DVD.

After years of rising VHS sales, they eventually began to stall. The studios began to see the end of their cash cow, and decided to reignite the fire. They settled on a new format (eventually) called DVD. DVD promised more features, higher screen resolution, and generally more band for your buck. They also required less of your bucks. 

In their infinite wisdom (and greed), the studios, and Blockbuster decided to do away with the rental window that brought them so much revenue in the VHS days. DVDs would be released the same day as VHS, only they'd be less than half the price. The industry began shifting away from rental profits and began gunning for consumer sales. DVDs were a huge hit, no doubt because of the both the quality and price of the product. DVD sales began rising, and the industry was happy once more. 

After seeing the revenue generated by DVD sales, a little Arkansas based company (which had only been known for carrying household goods before), decided to get in on the act. Over the past few years, Wal-Mart had been steadily infiltrating America, especially in the smaller towns and more rural areas. They were now poised to take over the entire country and DVDs (and Cds) were the item they needed to lure people in the door. 

At first, no one was very worried about the effect that Wal-Mart would have on the entertainment industry. If a DVD cost Blockbuster $15 and had an MSRP of $29.99, it would surely be the same at Wal-Mart, right? From the get go, Wal-Mart took a competitive edge in entertainment retail. They significantly lowered prices on the media to get people into the store. Once there, they hoped to attract the customer to other, high margin items, in the store. Suddenly, a DVD's worth went from $30 to $15. 

As expected, sales at video chains and music stores began a downward spiral. Consumers weren't willing to pay more for the same product; especially if they could get the cheaper product at the same place they could buy groceries. Rental profits had already begun to fall since the product was so cheap to purchase. Over a short number of years, the movie and music stores began to dry up. 

Over the past ten to twenty years, Wal-Mart has become a economic force like no other. They have grown so large and powerful, that they now have the power to dictate prices to the manufacturers. They have cannibalized local business to such a point, that they can use the fear of distribution against producers to their advantage. Many small towns (and now cities) have no music or movie stores, leaving Wal-Mart as the only available option. Wal-Mart, itself, has become a distributor of music with many large acts releasing their music exclusively to the retailer. 

Again, you can ask yourself...what's wrong with that? Why is it bad for DVDs or CDs to be so cheap? Weren't they overpriced to begin with?  The problem is that, with many items, Wal-Mart has begun a process that continually decreases a product's worth until it is not profitable to produce. 

Take the DVD, for example. With a $30 DVD, you can support a studio, a theater, and a rental retailer. When you begin chipping away at that price, you begin to lose the ability to support a part of the industry. A $15 DVD suddenly means that it's cheaper for 2 people to stay at home with the DVD than go to the theater to see the movie. A $15 DVD means that it is almost as cheap to buy a movie as the cost is to rent it. It also means that the studio is making less money, and unable to make as many films. (They also begin to produce more generic films, unwilling to take chances on more experimental films that may not turn a profit.) 

The devaluation process of the DVD continues beyond just the new releases. Let's say that you can pick up Transformers for $15 on the day it comes out. A few months later, that price will go down to $10. By Black Friday, the day after Thanksgiving, the price may drop as low as $7 or $8. A film that cost the studio $150 million to make is now being sold for $8. 

Customers begin seeing that price point in their head permanently. Instead of buying the DVD the day it comes out, they wait a few months to get it cheaper. They begin to disassociate the cost of the item with the item. At a point, the movie's value has become so small in the customer's mind, that they begin bootlegging and downloading the films instead of buying them. 

Video chains, like Blockbuster, who aren't able to broker deals with the studios like Wal-Mart, are forced to raise the price on their product to cover operating cost. They begin cutting back on the number of titles they carry, and the number of copies they have of a particular title. Soon, the rental price of a DVD goes from $4 to $1. Companies like Redbox can easily buy product from Wal-Mart at such a cheap price that they can afford to rent it from their kiosks at a discounted price.

What's the outcome of the Wal-Mart effect? Well, eventually, the once-sexy DVD stops being so attractive to customers. They don't move as fast or as numerous as they once did, and Wal-Mart begins scaling back on their stock of them. The video chains close their doors, unable to compete, and eventually customers are left with no where to buy the product.  Sales slump so badly that studios move away from physical media altogether and begin offering streaming and downloads only. Basically, it's a slash and burn of an entire industry.

I believe we are entering this final stage of the Wal-Mart effect. Video stores are closing left and right, even as Wal-mart remodels stores specifically to decrease the amount of entertainment media they carry. Eventually, we may be left with only 

The Wal-mart effect is not limited to just Cds and DVDs. Wal-mart has such control over the retail industry that they can dictate the prices of nearly any item. Companies that don't conform to Wal-mart's pricing guidelines often find themselves with less shelf room, and often, sitting next to Wal-Mart's brand of the same item. 

I believe that Wal-Mart's influence on the economy is self-perpetuating for the middle class. People who work at specialty retailers (like video and movie stores) find themselves out of work and often end up working for Wal-Mart. They are typically paid lower wages and can, therefore, only afford to shop at Wal-Mart. Small town residents are also likely to be limited to the few employers in the area; an area which almost always includes Wal-Mart.

What's the answer, then? I'm not sure. I believe some industries have been affected too heavily to be resuscitated. The music and video industry will almost surely collapse in the next few years. Other industries, however, could be saved...if something is done quickly. 

My best answer is to avoid Wal-Mart when possible. For many people, it may not be viable. If you live in a small town with no other stores, for instance. However, most of us live in places where we have other choices. The items may cost more at other places, but the quality may increase, as well. (Compare Wal-mart groceries to your local Easy Way or Farmer's Market!) 

Wal-Mart is not inherently evil. As with most things in life, it's ok in moderation.


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